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FX Update : FX Markets absorb latest central bank signals

Written by Ian Dobbs on September 27th, 2016.      0 comments

With last week’s busy central bank calendar out of the way we look forward to a quieter week this week. Outcomes of the respective meetings last week were mixed. The first meeting from the BoJ saw rates left on hold at -0.1% and the central bank pledge to overshoot on its 2% inflation target, this as it expands its monetary base indefinitely. However, limits to the success and extent of what the central bank can do have continued to see investors buy the JPY in the interim. The US Fed again pushed a move for a rate hike out and once again reduced the ‘dot plot’ rate path lower towards that of the market, a theme prevalent through 2016. Recent differing comments over the need for a move shows that achieving a consensus amongst Fed members will be difficult. In NZ the RBNZ left rates on hold, although maintained an open door for further easing in a statement that was seen as mildly more dovish than that expected by the market.

It was a quiet week in Australia last week that saw most of the influence come from discussion around central bank monetary policy. The talk came after new RBA Governor Lowe recommitted to the 2-3% medium term inflation target and emphasised the flexibility around the target and the importance of guiding expectations. The flexibility means that the RBA would not have to mechanically keep cutting rates just because inflation is below the target. The RBA minutes were largely unremarkable and highlighted that rates look set to stay on hold for the foreseeable future. Data released during the week had little effect and included house price data which showed a further moderation in home price growth in the year to June of 4.1%. The quarterly read of 2% (8% p.a.) was below expectations, although the main state capital cities of Sydney and Melbourne continue to experience more heated conditions. Look for a quiet week locally which features private sector credit and HIA new home sales numbers on Friday.

New Zealand
There has been little fresh news since Friday for the local currency. This has seen it stabilize after it lost ground on key crosses after last week’s mildly more dovish than expected Reserve Bank (RBNZ) OCR statement. The move by the central bank to leave rates on hold was expected. However, the apparent impact of the recent property LVR changes has once again focussed the market on the increased flexibility of the RBNZ to adjust rates lower should they achieve their desired goal of taking the heat out of the property sector. Further selling pressure was noted after last week’s GDT dairy auction which failed to lift to the degree expected. Other recent data included strong visitor and immigration numbers for August. Also trade numbers for August showed a deficit of $500M ($1.256B deficit), greater than expectations, on the back of both weaker than expected exports and higher imports. Expect direction this week to come from offshore with just building consents and the ANZ business confidence survey due on Friday.

United States
Investor attention last week was on the US Fed’s interest rate decision on Wednesday. This saw the FOMC remain on hold as they deferred a potential move for the December meeting. The Fed’s dot plot on rates was once again lowered towards that of the market. This trend has become familiar as the Fed’s expectations on future rates have come closer to the markets with each passing quarter this year. Data released during the week included numbers on homebuilder confidence which reached 11 month highs and housing market data which included large misses in housing starts, existing home sales and building permits. Both the Chicago Fed and Friday’s manufacturing PMI numbers also disappointed. Positive’s have come from the weekly jobless claims which continued the trend of positive reads from the labour market. Overnight new home sales numbers, which despite dropping in August continued their positive trend as builders back-logs reached a nine year high. Focus for this week will be on various Fed speakers, whilst on the data front the confidence and PMI numbers feature along with durable goods and GDP.

United Kingdom
Negative Brexit sentiment which has undermined trade in the pound sterling in recent days, comes as investors fear the imposition of tough conditions by the EU on the UK as it moves towards formal discussions on its exit from the EU. Comments from UK PM Theresa May and UK foreign secretary Boris Johnson indicate that the UK is looking in invoke Article 50 in early 2017, which would begin the formal exit process. Comments from ECB President Draghi overnight included one that the UK shouldn’t be granted any special favours on single-market access during the negotiations. This fear has been central to the weakness seen in the GBP over the last week. Data released last week was sparse. CBI Industrial trend numbers matched expectations whilst the Rightmove house price index of property coming to the market saw a rebound of 0.7% in September, after falling 2% over the previous two months. Data to feature this week will include mortgage numbers on Thursday and Q2 GDP data on Friday.

A much stronger than expected German IFO has seen the Euro get off to a positive start in trade this week. The business climate index rebounded strongly in its latest read rising to the highest level since May 2014. Both the current and expectations series were seen posting gains on the month prior. Data on Friday included a weaker than expected German Services PMI which weighed on the overall euro area indicator. Other data last week included a drop in the EU current account for July and German producer prices which fell into deflationary territory, largely on the back of falling energy prices. Comments from ECB President Draghi overnight included talking tough on UK access to the EU single market in the coming Brexit negotiations. He also covered the profitability issues faced by the European banks, this as leading German Bank Deutsche fell by 7.4% as speculation increases over its capital requirements and the possibility that state support may be required. In focus this week is further talk ECB from President Draghi, and various regional confidence and inflation reads.

Investor attention last week in Japan was centred on Wednesday’s BoJ monetary policy announcement which saw the central bank commit to overshooting on its 2% inflation target and expanding its monetary base until the goal is achieved. The move to commit to indefinite quantitative easing was accompanied by a shift to prevent a flatter yield curve in an effort to help Japanese banks and pension funds. No move to the interest rate was made (-0.1%), although Governor Kuroda noted yesterday that the main tool for further easing was lowering the rate further and lowering the long-term target as he pledged no limit to monetary policy. Data released during the week was understandably overlooked. August trade data was seen missing its consensus expectation, whilst the flash Nikkei Manufacturing PMI for September at 50.3 was above expectations and the first expansionary reading in seven months. Focus for this week will be on today’s BoJ monetary policy meeting minutes and industrial production/inflation data due on Friday.

Weaker than expected key Canadian data helped pressure the CAD in trade at the end of last week. The numbers included the August inflation report which missed expectations and was the lowest read since October. Core inflation which remained stagnant for the third straight month highlights the inflation concern that has emanated from the BoC recently.  Data from the retail sector was extremely underwhelming after the -0.1% read for July missed the +0.5% expectation by a large margin. Data earlier in the week had little impact on the markets after wholesale sales (also for July) rose by more than expected. Focus for this week is on the key oil producer meeting which is currently being conducted in Algeria, which has seen oil jump in recent trade. Friday’s GDP report will also be in focus and also watch for any important commentary coming out of BoC Governor Poloz’s speech at Western Washington University today.